UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1999 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 1-12928 Agree Realty Corporation - ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 38-3148187 - ----------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 31850 Northwestern Highway, Farmington Hills, Michigan 48334 - ----------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, included area code: (248) 737-4190 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No |X| |_| 4,364,867 Shares of Common Stock, $.0001 par value, were outstanding as of August 2, 1999 Agree Realty Corporation Form 10-Q Index - ----------------------------------------------------------------------------- Part I: Financial Information Page Item 1. Interim Consolidated Financial Statements 3 Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 4-5 Consolidated Statements of Operations for the six months ended June 30, 1999 and 1998 6 Consolidated Statements of Operations for the three months ended June 30, 1999 and 1998 7 Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1999 8 Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 9 Notes to Consolidated Financial Statements 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Part II: Other Information Item 1. Legal Proceedings 21 Item 2. Changes in Securities 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to a Vote of Security Holders 21 Item 5 Other Information 22 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 2 Agree Realty Corporation Part I: Financial Information - ----------------------------------------------------------------------------- ITEM 1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS ----------------------------------------- 3 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Balance Sheets (Unaudited) - ----------------------------------------------------------------------------- June 30, December 31, 1999 1998 -------- ------------ <S> <C> <C> Assets Real Estate Investments Land $ 39,945,162 $ 37,005,162 Buildings 131,886,962 128,861,505 Property under development 844,237 1,054,335 ------------- ------------- 172,676,361 166,921,002 Less accumulated depreciation (24,675,513) (23,022,291) ------------- ------------- Net Real Estate Investments 148,000,848 143,898,711 Cash and Cash Equivalents 13,721 994,159 Accounts Receivable - Tenants 217,451 645,052 Investments In and Advances To Unconsolidated Entities 789,244 1,135,409 Unamortized Deferred Expenses Financing 1,733,593 1,533,440 Leasing costs 287,323 302,694 Other Assets 807,928 761,066 ------------- ------------- $ 151,850,108 $ 149,270,531 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 4 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Balance Sheets (Unaudited) - ----------------------------------------------------------------------------- June 30, December 31, 1999 1998 -------- ------------ <S> <C> <C> Liabilities and Stockholders' Equity Mortgage Payable $ 53,530,848 $ 41,299,294 Construction Loans 12,702,599 8,874,326 Notes Payable 23,658,232 35,158,232 Dividends and Distributions Payable 2,317,670 2,309,136 Accrued Interest Payable 299,230 318,362 Accounts Payable Operating 503,238 721,485 Capital expenditures 348,631 1,444,517 Tenant Deposits 46,273 48,606 ------------- ------------- Total Liabilities 93,406,721 90,173,958 ------------- ------------- Minority Interest 5,945,454 6,047,843 ------------- ------------- Stockholders' Equity Common stock, $.0001 par value; 20,000,000 shares authorized, 4,364,867 and 4,346,313 shares issued and outstanding 436 435 Additional paid-in capital 63,217,235 62,873,987 Deficit (10,111,947) (9,448,351) ------------- ------------- 53,105,724 53,426,071 Less: unearned compensation - restricted stock (607,791) (377,341) ------------- ------------- Total Stockholders' Equity 52,497,933 53,048,730 ------------- ------------- $ 151,850,108 $ 149,270,531 ============= ============= <FN> See accompanying notes to consolidated financial statements. </TABLE> 5 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Statements of Income (Unaudited) - ----------------------------------------------------------------------------- Six Months Ended Six Months Ended June 30, 1999 June 30, 1998 ---------------- ---------------- <S> <C> <C> Revenues Rental income $ 9,514,741 $ 8,347,856 Operating cost reimbursements 1,222,747 1,040,904 Management fees and other 18,960 47,062 --------- --------- Total Revenues 10,756,448 9,435,822 ---------- --------- Operating Expenses Real estate taxes 843,782 723,847 Property operating expenses 662,393 524,611 Land lease payments 273,830 271,364 General and administrative 670,813 547,379 Depreciation and amortization 1,710,829 1,465,946 --------- --------- Total Operating Expenses 4,161,647 3,533,147 --------- --------- Income From Operations 6,594,801 5,902,675 --------- --------- Other Income (Expense) Interest expense, net (2,780,187) (2,438,725) Development fee income 40,873 59,031 Equity in net income (loss) of unconsolidated entities 13,869 (4,641) --------- --------- Total Other Expense (2,725,445) (2,384,335) --------- --------- Income Before Minority Interest 3,869,356 3,518,340 Minority Interest (517,274) (450,077) --------- --------- Net Income $ 3,352,082 $ 3,068,263 ========= ========= Earnings Per Share $ .77 $ .71 ========= ========= Weighted Average Number of Common Shares Outstanding 4,364,867 4,346,313 ========= ========= <FN> See accompanying notes to consolidated financial statements. </TABLE> 6 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Statements of Income (Unaudited) - ----------------------------------------------------------------------------- Three Months Ended Three Months Ended June 30, 1999 June 30, 1998 ------------------ ------------------ <S> <C> <C> Revenues Rental income $ 4,798,318 $ 4,177,315 Operating cost reimbursements 566,215 515,982 Management fees and other 9,697 22,805 ----------- ----------- Total Revenues 5,374,230 4,716,102 ----------- ----------- Operating Expenses Real estate taxes 421,370 363,222 Property operating expenses 216,090 249,642 Land lease payments 136,915 129,443 General and administrative 354,768 269,383 Depreciation and amortization 861,933 739,240 ----------- ----------- Total Operating Expenses 1,991,076 1,750,930 ----------- ----------- Income From Operations 3,383,154 2,965,172 ----------- ----------- Other Income (Expense) Interest expense, net (1,393,502) (1,198,668) Development fee income 40,873 -- Equity in net income (loss) of unconsolidated entities 6,935 (1,642) ----------- ----------- Total Other Expense (1,345,694) (1,200,310) ----------- ----------- Income Before Minority Interest 2,037,460 1,764,862 Minority Interest (272,377) (223,693) ----------- ----------- Net Income $ 1,765,083 $ 1,541,169 =========== =========== Earnings Per Share $ .40 $ .36 =========== =========== Weighted Average Number of Common Shares Outstanding 4,364,867 4,346,313 =========== =========== <FN> See accompanying notes to consolidated financial statements. </TABLE> 7 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Statement of Stockholders' Equity (Unaudited) - ----------------------------------------------------------------------------- Unearned Common Stock Additional Compensation - ------------------ Paid-In Restricted Shares Amount Capital Deficit Stock ------ ------ ------- ------- ----- <S> <C> <C> <C> <C> <C> Balance, January 1, 1999 4,346,313 $ 435 $62,873,987 $(9,448,351) $(377,341) Issuance of shares under Stock Incentive Plan 18,554 1 343,248 -- (327,450) Vesting of restricted stock -- -- -- -- 97,000 Dividends declared for the period January 1, 1999 to June 30, 1999 -- -- -- (4,015,678) -- Net income for the period January 1, 1999 to June 30, 1999 -- -- -- 3,352,082 -- ========= ======= =========== ============ ========= Balance, June 30, 1999 4,364,867 $ 436 $63,217,235 $(10,111,947) $(607,791) ========= ======= =========== ============ ========= <FN> See accompanying notes to consolidated financial statements. </TABLE> 8 <TABLE> <CAPTION> Agree Realty Corporation Consolidated Statements of Cash Flows (Unaudited) - ----------------------------------------------------------------------------- Six Months Ended Six Months Ended June 30, 1999 June 30, 1998 ---------------- ---------------- <S> <C> <C> Cash Flows From Operating Activities Net income $ 3,352,082 $ 3,068,263 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,668,214 1,423,037 Amortization 320,615 337,886 Equity in net (income) loss of unconsolidated entities (13,869) 4,641 Minority interests 517,274 450,077 Decrease (increase) in accounts receivable 427,601 (401) Increase in other assets (65,476) (117,484) Decrease in accounts payable (218,247) (142,713) Increase (decrease) in accrued interest (19,132) 12,607 Increase (decrease) in tenant deposits (2,333) 1,667 ----------- --------- Net Cash Provided By Operating Activities 5,966,729 5,037,580 ----------- --------- Cash Flows From Investing Activities Acquisition of real estate investments (including capitalized interest of $270,000 in 1999 and $210,671 in 1998) (5,755,359) (7,240,378) Investments in and advances to unconsolidated entities 354,412 463,700 ----------- --------- Net Cash Used In Investing Activities (5,400,947) (6,776,678) ----------- --------- Cash Flows From Financing Activities Mortgage proceeds 12,390,135 -- Line-of-credit net borrowings (payments) (11,500,000) 4,232,928 Dividends and limited partners' distributions paid (4,626,807) (4,577,558) Construction loan proceeds 3,828,273 2,145,822 Net increase in (repayment of) capital expenditure payables (1,080,087) (555,890) Payment for financing costs (381,153) (8,000) Payments of mortgages payable (158,581) (178,981) Payment of leasing costs (18,000) (28,635) Redemption of restricted stock -- (35,328) ----------- --------- Net Cash Provided By (Used In) Financing Activities (1,546,220) 994,358 ----------- --------- Net Decrease In Cash and Cash Equivalents (980,438) (744,740) Cash and Cash Equivalents, beginning of period 994,159 1,785,968 ----------- --------- Cash and Cash Equivalents, end of period $ 13,721 $ 1,041,228 =========== ========= Supplemental Disclosure of Cash flow Information Cash paid for interest (net of amounts capitalized) $ 2,625,406 $ 2,243,230 =========== ========= Supplemental Disclosure of Non-Cash Transactions Dividends and limited partners' distributions declared and unpaid $ 2,317,670 $ 2,292,765 Shares issued under Stock Incentive Plan $ 343,249 $ 405,830 =========== ========= <FN> See accompanying notes to consolidated financial statements. </TABLE> 9 Agree Realty Corporation Notes to Consolidated Financial Statements - ----------------------------------------------------------------------------- 1. Basis of The accompanying unaudited 1999 consolidated financial Presentation statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 1998 has been derived from the audited consolidated financial statements at that date. Operating results for the six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999, or for any other interim period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report for the year ended December 31, 1998. 2. Earnings Per Earnings per share has been computed by dividing the share income by the Share weighted average number of common shares outstanding. The amounts reflected in the consolidated statements of income are presented in accordance with Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share"; the amounts of the Company's "basic" and "diluted" earnings per share (as defined in SFAS No. 128) are the same. 3. Reclassifications Certain reclassifications were made to prior years' financial statements to conform with the current years' presentation. 10 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OEPRATIONS Overview The Company was established to continue to operate and expand the retail property business of its Predecessors. The Company commenced its operations on April 22, 1994 with the sale of 2,500,000 shares of common stock in an initial public offering. The net cash proceeds to the Company from the completion of this offering were approximately $45.4 million, which were used primarily to reduce outstanding indebtedness, pay stock issuance costs and establish a working capital reserve. On May 21, 1997, the Company completed an offering of 1,625,000 shares of common stock at $20.625 per share; on June 18, 1997 the underwriters exercised their overallotment option for an additional 28,850 shares at the same per share price (collectively, "the 1997 Offering"). The net proceeds from the 1997 Offering of approximately $31.9 million were used to repay amounts outstanding under the Company's Credit Facility. The assets of the Company are held by, and all operations are conducted through, Agree Limited Partnership (the "Operating Partnership"), of which the Company is the sole general partner and held an 86.63% interest as of June 30, 1999. The Company is operating so as to qualify as a real estate investment trust ("REIT") for federal income tax purposes. The following should be read in conjunction with the Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included in this Form 10-Q. Comparison of Six Months Ended June 30, 1999 to Six Months Ended June 30, 1998 Rental income increased $1,167,000, or 14%, to $9,515,000 in 1999, compared to $8,348,000 in 1998. The increase was the result of the development and acquisition of five properties in 1998 and one property in 1999. Operating cost reimbursements, which represent additional rent required by substantially all of the Company's leases to cover the tenants' proportionate share of real estate taxes and property operating expenses, increased $182,000, or 17%, to $1,223,000 in 1999, compared to $1,041,000 in 1998. Operating cost reimbursements increased due to the increase in real estate taxes and property operating expenses from 1998 to 1999, as explained below. Management fees and other income decreased $28,000, or 60%, to $19,000 in 1999, compared to $47,000 in 1998. The decrease was the result of a reduction in management fees resulting from the Company's acquisition of a property it previously managed. 11 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- Real estate taxes increased $120,000, or 17%, to $844,000 in 1999 compared to $724,000 in 1998. The increase is the result of the addition of new properties. Property operating expenses (shopping center maintenance, insurance and utilities) increased $137,000, or 26%, to $662,000 in 1999 compared to $525,000 in 1998. The increase was the result of increased snow removal costs of $121,000 and an increase in shopping center maintenance costs of $16,000 in 1999 versus 1998. Land lease payments remained relatively constant at $274,000 in 1999 compared to $271,000 in 1998. General and administrative expenses increased $124,000, or 23%, to $671,000 in 1999 compared to $547,000 in 1998. The increase was primarily the result of an increase in compensation-related expenses and state and local taxes. General and administrative expenses as a percentage of rental income increased from 6.6% for 1998 to 7.1% in 1999. Depreciation and amortization increased $245,000, or 17%, to $1,711,000 in 1999 compared to $1,466,000 in 1998. The increase was the result of the development and acquisition of five properties in 1998 and one property in 1999. Interest expense increased $341,000, or 14%, to $2,780,000 in 1999, from $2,439,000 in 1998. The increase in interest expense was the result of the Company's additional borrowing to finance its continued acquisition and development of properties. Development fee income decreased $18,000 or 31% to $41,000 in 1999, from $59,000 in 1998. This amount was not included in the Company's calculation of Funds from Operations due to the non-recurring nature of this type of income. Equity in net income (loss) of unconsolidated entities increased $19,000 to $14,000 in 1999 compared to ($5,000) in 1998 as a result of decreased depreciation expense in 1999 related to certain of the Joint Venture Properties in which the Company holds interests ranging from 8% to 20%. The Company's income before minority interest increased $351,000 as a result of the foregoing factors. Comparison of Three Months Ended June 30, 1999 to Three Months Ended June 30, 1998 Rental income increased $621,000, or 15%, to $4,798,000 in 1999, compared to $4,177,000 in 1998. The increase was the result of the development and acquisition of five properties in 1998 and one property in 1999. Operating cost reimbursements increased $50,000, or 10%, to $566,000 in 1999, compared to $516,000 in 1998. Operating cost reimbursements increased due primarily to the increase in real estate taxes from 1998 to 1999, as explained below. Management fees and other income decreased $13,000, or 57%, to $10,000 in 1999, compared to $23,000 in 1998. The decrease was the result of a reduction in management fees resulting from the Company's acquisition of a property it previously managed. 12 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- Real estate taxes increased $58,000, or 16%, to $421,000 in 1999 compared to $363,000 in 1998. The increase is the result of the addition of new properties. Property operating expenses (shopping center maintenance, insurance and utilities) decreased $34,000, or 13%, to $250,000 in 1999 compared $216,000 in 1998. The decrease was the result of decreased snow removal costs of $7,000 and a decrease in shopping center maintenance costs of $27,000 in 1999 versus 1998. Land lease payments remained relatively constant at $137,000 in 1999 compared to $129,000 in 1998. General and administrative expenses increased $86,000, or 32%, to $355,000 in 1999 compared to $269,000 in 1998. The increase was primarily the result of an increase in compensation-related expenses and state and local taxes. General and administrative expenses as a percentage of rental income increased from 6.5% for 1998 to 7.4% in 1999. Depreciation and amortization increased $123,000, or 17%, to $862,000 in 1999 compared to $739,000 in 1998. The increase was the result of the development and acquisition of five properties in 1998 and one property in 1999. Interest expense increased $195,000, or 16%, to $1,394,000 in 1999, from $1,199,000 in 1998. The increase in interest expense was the result of the Company's additional borrowing to finance its continued acquisition and development of properties. The Company received development fee income of $41,000 in 1999. This amount was not included in the Company's calculation of Funds from Operations, due to the non-recurring nature of this type of income. There was no development fee income in 1998. Equity in net income (loss) of unconsolidated entities increased $9,000 to $7,000 in 1999 compared to ($2,000) in 1998 as a result of decreased depreciation expense in 1999 related to certain of the Joint Venture Properties in which the Company holds interests ranging from 8% to 20%. The Company's income before minority interest increased $273,000 as a result of the foregoing factors. 13 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- Funds from Operations Management considers Funds from Operations ("FFO") to be a supplemental measure of the Company's operating performance. FFO is defined by the National Association of Real Estate Investments Trusts, Inc. ("NAREIT") to mean net income computed in accordance with generally accepted accounting principles ("GAAP"), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated entities in which the REIT holds an interest. FFO does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income as the primary indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. 14 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- The following table illustrates the calculation of FFO for the six months and three months ended June 30, 1999 and 1998: <TABLE> <CAPTION> Six Months Ended June 30, 1999 1998 ---------- ----------- <S> <C> <C> Net income before minority interest $3,869,356 $ 3,518,340 Depreciation of real estate assets 1,668,088 1,418,884 Amortization of leasing costs 33,371 37,285 Amortization of stock awards 97,000 78,000 Depreciation of real estate assets held in 333,290 350,440 unconsolidated entities Development fee income (40,873) (59,031) ---------- ----------- Funds from Operations $5,960,232 $ 5,343,918 ========== =========== Weighted Average Shares and OP Units Outstanding 5,038,414 4,984,272 ========== =========== </TABLE> FFO increased $616,000, or 12%, to $5,960,000. The increase in FFO is primarily the result of the acquisition and development of five properties in 1998 and one property in 1999. <TABLE> <CAPTION> Three Months Ended June 30, 1999 1998 ---------- ----------- <S> <C> <C> Net income before minority interest $2,037,460 $ 1,764,862 Depreciation of real estate assets 840,563 715,350 Amortization of leasing costs 16,685 20,105 Amortization of stock awards 48,500 39,000 Depreciation of real estate assets held in 166,645 175,221 unconsolidated entities Development fee income (40,873) -- ---------- ----------- Funds from Operations $3,068,980 $ 2,714,538 ========== =========== Weighted Average Shares and OP Units Outstanding 5,038,414 4,984,272 ========== =========== </TABLE> FFO increased $354,000 or 13%, to $3,069,000. The increase in FFO is primarily the result of the acquisition and development of five properties in 1998 and one property in 1999. 15 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- Forward-Looking Statements Management has included herein certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. When used, statements which are not historical in nature including the words "anticipate," "estimate," "should," "expect," "believe," "intend" and similar expressions are intended to identify forward-looking statements. Such statements are, by their nature, subject to certain risks and uncertainties. Risks and other factors that might cause such a difference include, but are not limited to, the effect of economic and market conditions; risks that the Company's acquisition and development projects will fail to perform as expected; financing risks, such as the inability to obtain debt or equity financing on favorable terms; the level and volatility of interest rates; loss or bankruptcy of one or more of the Company's major retail tenants; and failure of the Company's properties to generate additional income to offset increases in operating expenses. Liquidity and Capital Resources The Company's principal demands for liquidity are distributions to its stockholders, debt repayment, development of new properties and future property acquisitions. During the quarter ended June 30, 1999, the Company declared a quarterly dividend of $.46 per share. The dividend was paid on July 15, 1999 to holders of record on June 30, 1999. During the quarter ended June 30, 1999, the Company completed the following transactions with regard to its financing and development activities: o On April 1, 1999, the Company obtained replacement financing for a mortgage on its Lakeland, Florida property. The mortgage is in the amount of $7,700,000, bears interest at 7.00% and has a term of fourteen years, with a rate review at the end of the seventh year. The note requires monthly principal and interest payments in the amount of $61,948, based on an amortization period of 18.5 years. o On April 30, 1999, the Company, through a wholly-owned subsidiary, obtained a construction loan on a property it is developing in Columbia, Maryland. The construction loan is in the amount of $4,456,955, bears interest at a weighted average interest rate based on LIBOR and matures on October 16, 2002. The note requires interest only payments during the term of the loan. o On June 11, 1999, the Company, through a wholly owned subsidiary, obtained a construction loan on a property it is developing in Germantown, Maryland. The construction loan is in the amount of $4,138,248, bears interest at a weighted average interest rate based on LIBOR and matures on October 16, 2002. The note requires interest only payments during the term of the loan. 16 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- o On June 27, 1999, the Company, through a wholly-owned subsidiary, obtained a trust mortgage secured by four properties the Company had previously developed. The mortgage is in the amount of $12,390,135, bears interest at 6.63%, and matures on February 5, 2017. The note requires monthly principal and interest payments in the amount of $99,598 based on an amortization period of 17.67 years. As of June 30, 1999, the Company had total mortgage indebtedness of $53,530,848 with a weighted average interest rate of 6.91%. Future scheduled annual maturities of mortgages payable for the years ending June 30 are as follows: 2000 - $1,222,896; 2001 - $1,361,477; 2002 - $1,458,286; 2003 - $1,561,984; 2004 - $1,673,060. This mortgage debt is all fixed rate debt. In addition, the Operating Partnership has in place a $50 million line of Credit Facility (the "Credit Facility") which is guaranteed by the Company. The loan matures in August 2000 and can be extended by the Company for an additional three years. Advances under the Credit Facility bear interest within a range of one-month to six-month LIBOR plus 150 basis points to 213 basis points or the bank's prime rate less 50 basis points to plus 13 basis points, at the option of the Company, based on certain factors such as debt to property value and debt service coverage. The Credit Facility is used to fund property acquisitions and development activities and is secured by most of the Company's Properties which are not otherwise encumbered and properties to be acquired or developed. As of June 30, 1999, $23,158,232 was outstanding under the Credit Facility. The Company also has in place a $5 million line of credit (the "Line of Credit"), which matures October 19, 1999, and which the Company expects to renew for an additional 12-month period. The Line of Credit bears interest at the bank's prime rate less 50 basis points or 175 basis points in excess of the one-month LIBOR rate, at the option of the Company. The purpose of the Line of Credit is to provide working capital to the Company and fund land options and start-up costs associated with new projects. As of June 30, 1999, $500,000 was outstanding under the Line of Credit. The Company's wholly-owned subsidiaries have obtained construction financing of approximately $15,600,000 to fund the development of four retail properties. The notes require quarterly interest payments, based on a weighted average interest rate based on LIBOR, computed by the lender. The notes mature on October 16, 2002 and are secured by the underlying land and buildings. As of June 30, 1999, $10,972,109 was outstanding under these notes. The Company has received funding from an unaffiliated third party for the construction of certain of its Properties. Advances under this agreement bear no interest and are required to be repaid within sixty (60) days after the date construction has been completed. The advances are secured by the specific land and buildings being developed. As of June 30, 1999, $1,730,490 was outstanding under this arrangement. 17 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- The Company has three development projects under construction that will add an additional 68,000 square feet of retail space to the Company's portfolio. These projects are expected to be completed during the fourth quarter of 1999. Additional Company funding required for these projects is estimated to be $6,500,000 and will come from the Credit Facility and construction loans. Management expects the development of these projects to have a positive effect on cash generated by operating activities and Funds from Operations. The Company intends to meet its short-term liquidity requirements, including capital expenditures related to the leasing and improvement of the Properties, through its cash flow provided by operations and the Line of Credit. Management believes that adequate cash flow will be available to fund the Company's operations and pay dividends in accordance with REIT requirements. The Company may obtain additional funds for future development or acquisitions through other borrowings or the issuance of additional shares of capital stock. The Company intends to incur additional debt in a manner consistent with its policy of maintaining a ratio of total debt (including construction and acquisition financing) to total market capitalization of 65% or less. The Company plans to begin construction of additional pre-leased developments and may acquire additional properties, which will initially be financed by the Credit Facility and Line of Credit. Management intends to periodically refinance short-term construction and acquisition financing with long-term debt and/or equity. Upon completion of refinancing, the Company intends to lower the ratio of total debt to market capitalization to 50% or less. Nevertheless, the Company may operate with debt levels or ratios which are in excess of 50% for extended periods of time prior to such refinancing. Year 2000 Compliance The Company's information system consists of a three station Windows NT network system. All accounting and property management functions are processed via Timberline Software, a nationally recognized provider of software to the real estate industry. The Company is currently assessing its significant business relationships with external parties, including its major tenants, to determine if their failure to be Year 2000 compliant would have a material adverse effect upon the Company. In the event that any of the Company's significant tenants, vendors, banks or others with whom it does business do not successfully and timely achieve Year 2000 compliance, the Company's operations may be affected. To date, nothing has come to the attention of management that leads it to conclude that the likelihood of such adverse effect reasonably exists. However, because the complexities involved, management cannot provide assurance that the Year 2000 issue will not have an impact on the Company's operations. The Company has completed a review of its information systems and believes its business technologies are fully compliant with any issues that may arise as a result of Year 2000 issues. 18 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- Inflation The Company's leases generally contain provisions designed to mitigate the adverse impact of inflation on net income. These provisions include clauses enabling the Company to pass through to tenants certain operating costs, including real estate taxes, common area maintenance, utilities and insurance, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. Certain of the Company's leases contain clauses enabling the Company to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. In addition, expiring tenant leases permit the Company to seek increased rents upon release at market rates if rents are below the then existing market rates. 19 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate risk primarily through its borrowing activities. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and the Company's future financing requirements. Mortgages payable - As of June 30, 1999 the Company had three mortgages outstanding. The first mortgage in the amount of $33,492,105 bears interest at 7.00%. The mortgage matures on November 15, 2005. The second mortgage in the amount of $7,648,608 bears interest at 7.00%. The mortgage matures on April 1, 2013 and is subject to a rate review after the 7th year (April 1, 2006). The third mortgage in the amount of $12,390,135 bears interest at 6.63%. The mortgage matures on February 5, 2017. Construction loans - As of June 30, 1999 the Company had Construction loans outstanding of $12,702,599. Under the terms of the construction loans the Company bears no interest rate risk. Notes Payable - As of June 30, 1999 the Company had $23,658,232 outstanding on its Line-of Credit which was subject to interest at a variable interest rate based on LIBOR. The Company does not enter into financial instrument transactions for trading or other speculative purposes or to manage interest rate exposure. A 10% adverse change in interest rates on the portion of the Company's debt bearing interest at variable rates would result in an annual increase in interest expense of approximately $161,000. 20 Agree Realty Corporation Part I - ----------------------------------------------------------------------------- Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On May 10, 1999, the Company held its Annual Meeting of Stockholders. The following were the results of the meeting: The stockholders elected Richard Agree and Michael Rotchford as Directors until the annual meeting of stockholders in 2002 or until a successor is elected and qualified. The vote was as follows: Richard Agree Votes cast for 4,191,524 Votes withheld 36,749 Not voting 136,594 Michael Rotchford Votes cast for 4,188,169 Votes withheld 40,104 Not voting 136,594 21 Agree Realty Corporation Part II - ----------------------------------------------------------------------------- Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3.1 Articles of Incorporation and Articles of Amendment of the Company (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-11 (Registration Statement No. 33-73858, as amended ("Agree S-11")) 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Agree S-11) 10.1 Assumption Agreement, Mortgage Modification and Amended and Restated Mortgage and Security Agreement, dated as of March 31, 1999 by Agree Limited Partnership to and in favor of Nationwide Life Insurance Company 10.2 Project Loan Agreement dated as of April 30, 1999 between Wilmington Trust Company not in its individual capacity, but solely as Owner Trustee and Agree - Columbia Crossing Project L.L.C. 10.3 Project Loan Agreement dated as of June 11, 1999 between Wilmington Trust Company not in its individual capacity, but solely as Owner Trustee and Agree - Milestone Center Project L.L.C. 10.4 Trust Mortgage dated as of June 27, 1999 From Agree Facility No. 1, L.L.C. as Grantor to Manufacturers and Traders Trust Company 10.5 Employment Agreement, dated July 1, 1999, by and between the Company and Richard Agree 10.6 Employment Agreement dated July 1, 1999, by and between the Company and Kenneth R. Howe 27.1 Financial Data Schedule (b) Reports on Form 8-K None 22 Agree Realty Corporation Signatures - ----------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Agree Realty Corporation /s/ RICHARD AGREE - --------------------------------------- Richard Agree President and Chief Executive Officer /s/ KENNETH R. HOWE - --------------------------------------- Kenneth R. Howe Vice-President - Finance and Secretary (Principal Financial Officer) Date: August 2, 1999 - --------------------------------------- 23